August update

In recent months there has been a considerable degree of confusion regarding the EU’s Generalised Scheme of Preferences (GSP) and the impact it may have on oil prices within the EU.

The GSP allows import tariff exemptions on goods from developing countries, thereby encouraging trade with poorer countries. It may come as a surprise that, at present, countries eligible to benefit from the scheme include Russia and most of the Persian Gulf (including Saudi Arabia). However, the World Bank has now reclassified these nations as upper-middle income economies which will mean that, from 1st January 2014, all standard import tariffs will apply. To compound matters further, Libya, a key supplier of jet fuel into the Med, is considered to be on the verge of a World Bank upgrade, so may soon be subject to the same import tariffs.

Information coming out of Brussels on how this relates to oil imports has not exactly been clear: initial reports were that, as of the start of next year, all crude oil and refined product imports from the newly upgraded nations would be liable for duty at 4.7%. This was swiftly followed by the news that all oil products would in fact remain exempt, before the latest update confirmed that jet fuel (kerosene) will be liable for duty whereas crude oil and low sulphur gasoil/diesel (less than 0.2% sulphur) imports will remain exempt.

“If the planned changes do go ahead, a large amount of imported European kerosene will see price increases of 4.7%”

What would be the implications of a 4.7% import tariff on kerosene jet fuel? At present, the EU as a whole imports roughly one million tonnes of jet fuel per month from the Persian Gulf and North Africa, with imports nudging two million tonnes in peak (holiday) periods. A source from a state run Persian Gulf oil refinery explained, “We are concerned these changes from the EU will cut demand for jet fuel from the Middle East region [which] will hurt our own refining margins at a time when we are expanding our capacity, in part to meet European demand.”

At the same time, questions are being asked of the extent to which refineries in India (which will remain a GSP beneficiary) could step up to any increase in demand. We could well end up in a situation where refined jet fuel from the Middle East regularly travels to Europe via an intermediary in the Far East, thus still qualifying for import tariff relief under the GSP – hardly the intended effect of the scheme and certainly not a supply-chain likely to bring down prices. Another likely consequence is that, if jet fuel in Europe does end up being sold at a premium to that of the rest of the world, airlines will look wherever possible to refuel outside of the EU to reduce costs.

In recent weeks there have been increasing noises coming out of the EU to suggest that the import tariff on jet fuel could be avoided altogether if the Gulf Cooperation Council States (Saudi Arabia, Kuwait, Bahrain, Qatar, UAE and Oman) reconsider engaging in bilateral trade negotiations with the EU, which have been on hold since 2007. So depending on your opinion of the EU, this whole episode could be considered either as strong-arm tactics to boost trade with the Middle East (“come back to the table on the trade bilaterals or we will block your fuel imports”), or an EU oversight and failure to consider the actual implications of the GSP.

If the planned changes do go ahead, a large amount of imported European kerosene will see price increases of 4.7% and for distributors that should be a worry. Not only is the legislation set to be applied in the midst of the heating oil season (Jan 2014), but for an industry already under pressure to prove its consumer value versus other methods of heating, a jump of circa 2.5ppl will not be welcome.

“We could well end up in a situation where refined jet fuel from the Middle East regularly travels to Europe via an intermediary in the Far East”